Educational Articles

From The Survey: Alliance Data Systems Corp.

Robert J. Scrudato
| November 02, 2013

Alliance Data Systems Corporation (ADS) is a provider of data-driven and transaction-based marketing, and customer loyalty solutions. It operates under several subsidiaries, each of which supplies a variety of marketing and consulting services, including database marketing and interactive communications. These business groups consist of its flagship Alliance Data Retail Service, and subsidiaries LoyaltyOne, and Epsilon. The company was established on December 2nd, 1996 as the result of a merger between J.C. Penney’s (JCP) credit card processing group and The Limited’s credit card banking business. The company would later acquire LoyaltyOne in 1998.

Since that time, Alliance Data has made a good name for itself in the information services space. Its share price has steadily risen to over $200 in the highly competitive industry, as investors likely recognize the value of its data-driven, target marketing products offered through its private label segment. These products are expected to add big value to the company’s top line next year, according to management, based on the fact that as the tech world grows, businesses have a greater desire to understand the individual consumer so they can augment their products to better suit their customers’ needs.

These initiatives paved the way for the advancement of Epsilon. The direct-to-customer brand has fit the need for growing the company’s clientele and has flourished in recent months. Its contributions represented 32% of the company’s top line in the third quarter. What’s more, internal efforts to rewire business operations allowed Alliance Data to attain new clientele while simultaneously improving efficiency measures. Barring a potential economic downturn, we would be hard pressed to expect different results moving forward, and management seems to agree, based on its 2012 acquisition of Hyper Marketing.

Indeed, the company’s most recent acquisition was made with the intent of strengthening Epsilon’s position in the marketing services space. Hyper Marketing was purchased for $460 million, and it offered Alliance Data the return on investment (ROI) marketing products that are popular on the market today. Current clientele, including a multitude of Fortune 100 companies and some of the top advertisers in the nation, seem to appreciate the addition, as the segment’s top line has expanded in strong fashion ever since.

This is not the only business segment that has done well, however. Private label offerings that Alliance Data has developed through its credit retail services have become extremely valuable to those companies it services. These programs offer a better understanding of where a customer is shopping, what they are shopping for, and why they make particular choices, while also considering concise demographic information. The private label segment has generated the majority of Alliance Data’s top line for years, and experienced year-over-year revenue growth in excess of 15% in each quarter during 2013.

This expansion is not always a positive, however. As Alliance Data continues to grow, it too, draws the attention of some of the largest competitors in the information services industry. Market makers like Thomson Reuters (TRI.TO), Moody’s Corp. (MCO), and Nielsen Holdings (NLSN) all represent worthy adversaries with comparable products and equally respected reputations. Indeed, market share of these respective firms is substantial, and most have experienced share price growth worth noting over the last year. That is not to say the success ADS has achieved lacks staying power. In fact, it would seem the praise it has received for its differentiated marketing products is unparalleled. For investors looking to take a position in this space, however, the structure of the industry, and particularly its competition, is worth noting.

For a more detailed evaluation of Alliance Data Systems Corp.’s business prospects, as well as our take on the investment merits of the stock, subscribers are encouraged to check out our full page report in The Value Line Investment Survey.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.